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Article

New Ontario Legislation Regulating the Franchise Industry

Date

January 1, 2001


 

Introduction
On January 31, 2001, Ontario becomes only the second province in Canada to regulate the franchise industry. The Ontario legislation is unique in that it imposes on each party to a franchise agreement a duty to act in accordance with reasonable commercial standards. The Arthur Wishart Act (Franchise Disclosure), 2000 (the Act) also requires franchisors to provide comprehensive disclosure information to any prospective franchisee.

The Act imputes the following three key duties in each franchise agreement, whether already in existence or new:

- each party to a franchise agreement must act fairly in its dealings with one another;

- the franchisor is not permitted to interfere with or restrict the franchisee’s right to associate with other franchisees; and

- the franchisor must provide a prospective franchisee with a disclosure document, including all material facts and financial information.

The Arthur Wishart Act derives its name from the former Attorney General of Ontario, Arthur Wishart, who devoted much effort to the franchise issue when he served as Minister of Financial and Consumer Affairs in the government of Premier John P. Robarts over 30 years ago.


Broad Scope of the Act
A "franchise agreement" is defined to mean any agreement that relates to a franchise between a franchisor or franchisor’s associate and a franchisee; therefore, documents which may not normally be considered to be franchise agreements may be caught by the Act. A "franchise" is broadly defined to mean a right to engage in a business where the franchisee is required to make payments to the franchisor in order to acquire or operate the business, and where the franchisor either:

(a) grants the franchisee the right to sell goods or services that are substantially associated with the franchisor’s trade-mark or other commercial symbols while exercising significant control over the franchisee’s method of operation, or

(b) where the franchisor grants the franchisee the distribution rights to sell goods or services supplied by the franchisor while providing location assistance to the franchisee. Certain continuing commercial relationships, however, are exempt, including partnerships and employer-employee relationships.


The Duty of Fair Dealing

The Act imposes a duty of fair dealing on each party to a franchise agreement, with a right of action for damages for any breach. This includes both the duty to act in good faith and the duty to act in accordance with reasonable commercial standards. Significant interpretation issues are likely to arise as parties seek to apply these broadly-defined common law principles to franchise agreements.


The Right to Associate

The Act protects a franchisee’s right to associate with other franchisees and to join an organization of franchisees. The franchisor is prohibited from interfering with or restricting this right, or penalizing the franchisee, either directly or indirectly, for exercising this right. Any provision in a franchise agreement purporting to interfere with or restrict a franchisee from exercising this right is void.


The Duty to Disclose
The Act requires a franchisor to provide a prospective franchisee with an accurate, clear, and concise disclosure document at least 14 days before the earlier of the prospective franchisee signing an agreement or making a payment. The disclosure requirement is quite extensive as all material facts, all proposed franchise agreements and agreements related to the franchise, financial statements, and other information must be provided in order to ensure informed investment decisions. Material changes must be disclosed as soon as practicable after the change has occurred and before an agreement is signed or a payment is made.

A "material fact" is any information about a business that would reasonably be expected to have a significant effect on the value or price of the franchise or the decision to acquire the franchise. The legislation also captures a decision to implement a change, for example, made by senior management that is likely to be approved by the Board of Directors even if the Board has not yet met to consider such a change.


Exemptions from the Disclosure Requirement
The legislation recognizes that not all investors require such extensive and detailed disclosure:

- Sophisticated Investor — if the prospective franchisee invests at least $5 million over one year in the acquisition or operation of a franchise

- Fractional Franchise — if the anticipated sales of the franchised goods or services within the business of the prospective franchisee do not exceed 20 per cent in relation to the total sales of the business

- Small Franchises — if the total annual investment to acquire and operate the franchise is less than $5,000; or if the franchise agreement is not valid for longer than one year and does not involve the payment of a non-refundable franchise fee; or if the franchisor is governed by the multi-level marketing or direct selling provisions of the federal Competition Act

- Additional Franchise to an Existing Franchisee — if an additional franchise granted to an existing franchisee is substantially the same as the existing franchise, providing there has been no material change since the existing franchise agreement or latest renewal was entered into

- Renewal or Extension of an Existing Franchise Agreement — if a franchise agreement is renewed or extended, providing there has been no interruption in the operation of the business nor any material change since the franchise agreement or latest renewal was entered into

- Grant of a Franchise by a Franchisee — if the grant is for the franchisee’s own account and the grant is not affected by or through the franchisor

- Grant of a Franchise to an Officer or Director of the Franchisor or Franchisor’s Associate

- Grant of a Franchise by a Third Party on behalf of a person other than the Franchisor, such as an executor, receiver or trustee

In addition to the full exemptions, a partial exemption limited to financial disclosure (the Mature Franchisor Financial Exemption) is available until January 31, 2006, for large franchisors, with a net worth of at least five million dollars and at least 25 franchisees in Canada or in any single jurisdiction, providing the franchisor has not had any fraud or related judgments against it during the preceding ten years.

The Act does not include an exemption for a fully refundable deposit or confidentiality agreement, as available in the Alberta franchise legislation.

The exemptions listed apply only to the franchisor’s duty to disclose. There are no exemptions available with respect to the other obligations imposed by the Act.


Serious Consequences for Inadequate Disclosure or Misrepresentation

Failure to disclose or providing misleading, inadequate or late disclosure has serious implications, including the franchisee being granted the right to rescind the franchise agreement without penalty. Upon rescission, the franchisor must refund the money paid by the franchisee, purchase the franchisee’s remaining inventory, supplies and equipment, and compensate the franchisee for losses in acquiring, setting up and operating the franchise.

If the franchisee suffers a loss because of a misrepresentation in the disclosure document or in the statement of material change, the franchisee may have a right of action for damages against the franchisor, its associate, its agent, its broker and every person who signed the disclosure document or statement of material change.


Prohibition on Waiver or Altering Jurisdiction
Parties are prohibited from contracting out of the Act. In addition, franchise agreements may not restrict jurisdiction or venue to a forum outside Ontario. Any provisions purporting to do either are void.


Application of the Act
The Act, passed on May 17, 2000, implements the law in stages. Excluding disclosure, the Act applies to franchise agreements entered into or renewed after July 1, 2000, if the business operating under the franchise agreement is to be operated partly or wholly in Ontario. The duty of fair dealing, the right to associate and the prohibition on waiver, however, apply to franchise agreements which were entered into before July 1, 2000. The duty to disclose comes into force on January 31, 2001. With the full implementation of the Arthur Wishart Act, both franchisors and franchisees in Ontario should prepare themselves for significant changes.

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